The reporting of derivative trades under the European Market Infrastructure Regulation is proving anything but a clear-cut exercise and, as issues persist, many industry players believe it could take up to six months longer to get things right.

Tom Riesack, managing principal at consultants Capco, said: “It was clear from the start that not everything would go smoothly. There is awareness that this process is likely to take another four to six months.”

Kenton Farmer, European head, OTC derivatives operations at fund administration services provider SS&C GlobeOp, which is offering delegated reporting services to clients, said the regulation “was like a train coming towards us” and puts the time needed to “tidy up the reporting process” at 90 days.

While many initial reporting issues are still unresolved, questions are also now being asked over how Emir will work in the long term. Farmer said: “Emir requires ongoing reporting on transactions but many organisations have found that their existing systems do not support the ability to look for new records and report on an ongoing basis.”

SuperDerivatives, which is helping organisations develop reporting solutions, also believes that further investment is needed. Carlo Scotto, sales manager, at the infrastructure, market data and services company, said: “Even companies with the best infrastructure in place do not know which systems the required information is held on. They have to make sure that, for every event in the life cycle of a trade, they can ensure flows of the right information to a database for uploading to a repository.”

Emir had its genesis in a meeting of the G20 nations in 2009, which resolved among other things to have derivatives centrally reported to new trade repositories, which aggregate the data to reduce risk and provide regulators with a clearer picture of who is trading in what derivatives. However, the whole task has proved more complex than expected – especially in Europe, where the reporting requirements are more onerous than in the US.

While many financial institutions were ready to report transactions to trade repositories on February 12, several corporates, and small and medium-sized enterprises in particular, failed to meet the deadline.

One of the issues is that, to report on trades, everyone involved in a deal has had to obtain a legal entity identifier, a 20-digit reference number to identify their organisation. When reporting trades they need to obtain their counterparty’s identifier too.

Related

According to Jeremy Jennings-Mares, partner at lawyers Morrison and Foerster, some organisations have still not filed their reports, and he attributed this largely to problems obtaining counterparty legal entity identifiers. He explained that many non-financial institutions were slow to apply, meaning “there was a massive rush at the end to get them”.

However, non-reporting was not down to derivative users alone. Six trade repositories were appointed for the task – DTCC; the London Stock Exchange’s UnaVista; Regis-TR, a joint venture between Clearstream and Spain’s Iberclear; Poland’s Krajowy Depozyt Papierów Wartosciowych; Ice Trade Vault Europe (UK); and CME European Trade Repository. Some were not up to speed.

According to Farmer, the DTCC Derivatives Repository experienced a lot of trouble with onboarding.

A spokeswoman for the DTTC Derivatives Repository said that it had onboarded all clients who signed up as of January 28 to connect to its system and is adding clients daily. “We have 27,000 accounts in the repository and are processing more than 75 million new messages weekly. This is an unprecedented, large-scale industry initiative, and we are working closely with our clients to resolve any outstanding onboarding challenges,” she said.

Capco pointed out that, although some of its financial clients were ready, the trade repositories concerned had not set them up – or set them up incorrectly – in their production environments.

Carsten Hahn, managing principal, Capco, said: “Some of the repositories underestimated the volumes of reporting they would receive, and as a result some [financial institutions] were not set up correctly. They were not able to send the data required in an automated way, and had to send encrypted files via email.”

Farmer said that inconsistencies in the data requirements of the six repositories, and changes to their specifications, added to the problems. SS&C GlobeOp originally planned to work with four repositories but subsequently narrowed its focus to two.

Farmer said: “One [repository] ended up issuing what was probably version six or seven of the trade file specifications. We are a technology company – and we had problems keeping pace with it all.”

Participants were also held back by a lack of guidance on unique trade identifiers, the numbers needed to identify trades. Scotto said: “Generating a UTI is relatively straightforward, but the big question is: which party in the two sides of a transaction should generate it?”

Farmer said: “It was not until February 11 that the European Securities and Markets Authority issued guidance on what the UTI should look like – the night before the deadline – and it gave four new definitions of how to create this reference number.”

An Esma spokesperson said: “We continuously update our questions and answers so as to provide quick answers to questions received – this happened at different instances prior to the reporting date and will continue in the future if need be.” Although the use of interim legal entity identifier codes was allowed, these interim identifiers, and those generated for each transaction, now need converting to proper codes – adding to the workload.

However, how much extra time derivative users can expect to fully comply with Emir remains unclear. Jennings-Mares believes it is too early to consider imposing penalties: “There are penalties that could be levied already, but regulators need to be aware of what is and what is not realistic.”

The Financial Conduct Authority, the UK regulator, was unavailable for comment.

--This article first appeared in the print edition of Financial News dated March 10, 2014